Renting vs. Buying: The Realities of Home-Ownership

This is a guest-post from Tim Ellis, author of Seattle Bubble, a blog and forum dedicated to discussing real estate market conditions in the Seattle area.

“If you rent, you’re throwing away your money.”
“Owning your own home is a forced savings plan.”
“Home ownership is an excellent path to build wealth.”

You’ve probably heard statements like these plenty of times. On television, radio, the internet, and in casual conversation. Such sentiments are common in any discussion that involves home-buying and personal finances. It’s common knowledge that buying a home is a better financial move than renting. After all, you’re building equity instead of throwing away your money, right? Well, maybe not quite… Rather than assuming the “common knowledge” on this subject is accurate, let’s take a look for ourselves at some of the financial differences between renting and home-buying.

A Real-World Example
For the purpose of comparing renting to owning in this article, I’ll be using real-world data gathered from my area (northeast of Seattle). Although most first-time buyers tend to move from renting an apartment to buying a larger, stand-alone house, as much as I can I will compare apples to apples.

For rent, I located a 3-bed, 2.5-bath, 1,840 sqft house with an attached 2-car garage, on 0.2 acres. Monthly price: $1,495.

For purchase I found a 3-bed, 2.5-bath, 1,850 sqft house with an attached 2-car garage, on 0.22 acres. Price: $424,950.

The two homes are located within two miles of each other in similar neighborhoods, and neither is located on a busy road. We’ll assume that our hypothetical homebuyer is a married couple with $85,000 in the bank to make a 20% down payment. To calculate mortgage payments we will use a recent 30-year fixed interest rate of 6.25%.

Let’s look at how the monthly costs break down (approximately) for our hypothetical potential first-time homebuyer:

Renting

Buying

Rent/Mortgage:

$1,495

$2,093

Insurance:

$20

$163

Property Tax:

-

$407

Tax Savings*:

-

($327)

Maintenance:

-

$354

Total:

$1,515

$2,690

*: (less standard deduction)

Right off the bat, you see that simply trading straight across from renting to owning results in a 78% more expensive monthly bill. That’s not exactly chump change. With even a slight upgrade from renting to buying (which most first-time buyers are prone to do), you can easily see how the total monthly costs would be more than double.

“If you rent, you’re throwing away your money.”
Common knowledge says that despite today’s large premium, buying a home is a “good investment”. Hey, at least you’re not “throwing away” your money, right? True, the renter in our scenario spends $1,515 every month that they will never see again. I wouldn’t exactly say it has been “thrown away” any more than money spent on any other good or service is “thrown away,” but granted, there is zero financial return on that money.

However, when you take a look at the breakdown of the homebuyer’s monthly expenses, a large amount is money that will never return, either. Insurance, property tax (less tax savings), and maintenance, add up to $517 every month that is being “thrown away.” Even worse is the amount spent on mortgage interest. Consider how much of a mortgage payment is applied toward loan interest throughout the life of a 30-year fixed loan:

Years

% toward interest

0-5

~80%

6-10

~70%

11-15

~60%

16-20

~50%

21-25

~35%

26-30

~10%

In the first five years, approximately 80% of the mortgage payment goes toward interest. That’s an additional $1,674, for a total of $2,191 being “thrown away” every single month by the homebuyer for the first five years. Ouch! In fact, not until the homebuyer has been paying down the mortgage for over 20 years will the amount they are “throwing away” be less than the renter.

“Owning your own home is a forced savings plan.”
As you can see above, if home buying is like a savings plan, it’s probably the worst savings plan on Earth. Would you voluntarily sign up for a savings plan where well over half of the money you deposit in the first 20 years simply vanishes, and from which you can only withdraw money by relocating and paying a 6-9% fee (not on the amount you have “saved” mind you, but on the total sale price of the home)? Of course not. That doesn’t sound anything like a savings plan.

If our potential homebuyer has that $85,000 saved up for a down payment and deposits it along with just half of the monthly savings over buying ($578 per month) into an account at 8% interest, the balance will be nearly $300,000 in just 10 years. That’s a liquid investment, that can be used for whatever you want, no relocation required. Buying a home is not a savings plan. Actually saving money every month is a savings plan.

“Home ownership is an excellent path to build wealth.”
If your goal is to build wealth, you will be much better off investing your money in the stock market than buying a home. While both stocks and housing are cyclical markets, long-term historic trends show that housing appreciates at a rate barely above inflation, while stocks tend to return an inflation-adjusted 7-10%. In our hypothetical scenario, a renter who invested in the stock market with the $85,000 down payment plus the monthly difference between the $1,515 rent and the $2,690 home-buying costs would be over $500,000 better off after 30 years than the homebuyer, assuming 4% average appreciation.

An important thing to consider is that home prices in the United States are just now beginning to correct from an enormous unprecedented run-up in recent years. Despite what those in the business of selling real estate may insist, the correction in housing is still in the early stages. Four percent is most likely overly optimistic for most areas in the next 5-10 years. The only thing we know for sure is that double-digit gains are gone and won’t be coming back any time soon.

Also keep in mind — I mentioned it above but it bears repeating — in order to cash in on any “wealth” you build through your home you will need to sell that home and move. No, “extracting equity” does not count, since that simply results in a larger debt. Debt is not equal to Wealth.

Conclusion
For most people buying a home will result in their largest monthly bill (by far), and because they believe that it will bring them wealth or that they are “throwing away their money” if they rent, they often take on a much larger home debt than a prudent budget would allow. It is a real shame when people are driven to get into the housing market because of misplaced notions of imagined financial benefits. Of course, everyone’s circumstances are different, and for some (particularly those that live away from the coasts) the numbers may actually work out in favor of buying.

Don’t misunderstand me here. I am not saying that no one should buy a home, or that my example scenario is a golden standard of truth for all. Don’t take my word for it. Run the numbers for yourself, check out other articles (a small collection is listed below), and do what works for you. I highly recommend the great graphical calculator from The New York Times for comparing the financial aspects of renting and buying. Many people will consider all of the consequences — financial, emotional, etc. — and conclude that buying a home is the best decision. Just don’t trick yourself into thinking it’s a good financial decision if it’s not.

I myself intend to buy a house some day. However when that day comes, I will be buying a house because I want a nice, “permanent” place to live where I’m the boss, not because I think it will help me get me rich.

“In fact, not until the homebuyer has been paying down the mortgage for over 20 years will the amount they are “throwing away” be less than the renter.”

This assumes that the renters rent never goes up, unlike a fixed rate mortgage it surely will. Also if the homeowner had gotten a 15 year fixed then at year 20 he would be on his fifth year of rent/mortgage free living.

As a late-blooming homebuyer (I waited until age 48 to buy my first home), I do find myself a bit nostalgic for the relatively carefree renter’s life. I went from renting a three-bedroom apartment for $550/month to a three-bedroom house (not much more room but we now have a basement) for which I’m paying $2600/month (15-year mortgage), so the biggest impact on me has been cash flow. There are also lots of expenses that I don’t think we’d be making if we moved to another apartment, like new (better) furniture, curtains, a lawnmower, yard tools, etc., none of which will add to the value of the house but do improve our quality of life. However, those may be offset by the headaches of having to deal with and pay for all the repairs ourselves…it was so nice when you could just call the landlord and say, “sorry, but the roof is leaking.”

I agree with much of what you have said. However I think you need to rethink the investment aspect. The leverage makes a difference because it effectively allows you to multiply your returns. While I am aware you can borrow to buy stocks the APR on these loans is typically much higher and the LVR lower. I’m personally keen on a mixed portfolio including both stocks and property.

Rents increase over time. The PI portion of a fixed-rate mortgage will not increase. Property taxes will increase over time. Leases often say that the rent can be increased by an amount equal to the increase in property taxes. House values also increase over time.
A renter gets no benefit from this.

While I agree with most of your points, I have to say the example data is unrealistic, at least for the purpose of proving your point.

Generally speaking, you won’t find $425K houses renting for $1500. As your numbers show, that’s a hefty loss from what the landlord would likely be paying each month for mortgage, tax, and insurance. While landlords often do rent at a loss for the first few years (until they can raise the rent), a 40% loss is MUCH higher than normal. The housing market would have to have just tanked.

I just looked at some comparable rates in my area (Atlanta), and see that ~$1500 rent gets you a home that would sell for around $325K.

I hate it when PF Blogs let someone post about how renting isn’t such a bad deal. Renting sucks. How much do the renters benefit when property values rise? They don’t.

If you own, you have a stake in a market that consistently rises.

I purchased a condo for 62K, and continued to pay mortgage and taxes consistent with what I would have paid to rent it. Sold that condo 5 years later for 148,500.

Even if the market had not gone up, I would have walked away with thousands in equity.

If I had just rented it, I would have had walked away with nothing (except maybe my damage deposit).

Yeah owning requires some investment, and anyone can put together a graph showing how renters pay less, but the market changes and when it does, owners have an opportunity to benefit, whereas renters never do.

I love it – your hose payment is not leverage, it is simply debt. Now the mention that real estate always goes up is obviously delusional, you caold spend decades hoping to “break even” if you happen to buy near a blow off top. I agree with this article and have been a rich renter.

I’d like to add that there is another aspect: money availability.
Life is uncertain, you might need extra cash someday, and if you need to sell your house for that, that’s not easy. And if you desperately need that money you surely won’t make the best possible deal.

@Jeff, to make a fair comparison you need to estimate how well you’d be off if you took the money you’d save by renting and invested it. In fact, in some markets where property values are not consistently rising (and those bought in a bubble that is about to burst), you may come out ahead in the long run by renting and investing the difference. This is now common financial wisdom, there’s nothing controversial about it.

I agree with Jeff. There is something to be said for those of us fortunate enough to have caught the real estate boom. We bought our first house in 1999 for $75,900 and sold it three years later for $152,000. We purchased another house in an area that had yet to catch up to the US market for $114,000 and it is currently on the market for $217,000. Finally, because of a job relocation we’ve purchased another house in a county with issues regarding the septic systems (laws are being hashed out and it’s slowed the real estate market considerably.) We bought this house for $185,000, we’ll put the new $13,000 septic system in to bring it up to the new codes. It assessed for $260,000.

All that to say that if we had rented, we would not have been able to bring our personal value up to a quarter of a million, plus the money we invested from the extra equity after the sale of our first home.

But…looking at our situation, I would have to consider that it is probably not the norm…

I should also point out that the reason we didn’t rent initially (and we did look) is that in our area a 1 bedroom cost $800. Before utilities, our first home cost us about $700 a month, including taxes and insurance. If renting would have been cheaper, we probably would have rented.

Do most people live in overinflated markets though? I wonder. I agree you shouldn’t be buying now if the market is overinflated where you live, but is that the case everywhere?

This also assumes that the person is going to invest the difference, or even save the difference, which most people won’t. Worse, it assumes they will be a savvy investor, which requires a certain amount of dedication and interest in the stock market, which most normal people don’t have. Unless they pay a pro to do it (ie get a mutual fund), but that is going to eat into your 8% after inflation.

I agree with the underlying point though — Don’t think of your home as an investment.

How much do the renters lose when property prices drop? Home buyers have a lot to lose when housing prices drop. It’s a double edged sword. Just because you made some money on your house doesn’t mean it’s universal or even normal. There’s a lot of people out there trapped in their overpriced homes, or worse, facing foreclosure because they thought the market would always go up and they got in over their heads.

My husband and I made 150k when we sold our house. Right now we are happy renters because it’s not always a good time to buy real estate. We paid off all of our debts and are enjoying accumulating money and having the flexibility that renting brings us.

Buying a place to live is not always a good thing, or a bad thing. I plan on buying again at some point, but like another poster mentioned, I’m buying a place to live, not an investment to live in.

I’m happy to see this post and would like to see more posts like it on this an other personal finance blogs. We need some common sense after several years of “Buy now or be priced out of the market forever – real estate never goes down!!!!!” hysteria.

Another aspect of this is whether you plan to continually “buy up” into bigger and bigger homes. My fiance and I are going to build a house in 2 years, but we don’t plan to ever move, so by the time we retire we will no longer have a house payment.

very good points made, and certainly people should look long and hard at the actual cost of renting vs. buying. for us, buying only made us have an increase of $100 a month, so it was the wise move. in our area rents are were as high, or close to, buying costs (this may have changed in the past years).

and, although it’s rarely mentioned in financial circles… there is a very good feeling in knowing that you are going to be somewhere for a long time. renting is a very unsure way to live (such as in our case, where the owner decided to sell and we had to move someplace new). we don’t have to worry about that anymore.

It’s true that one shouldn’t accept conventional wisdom on its face, and I’m glad that you’ve pointed this out. However, there are a few things that you don’t seem to have calculated for:

(1) The value of a home is likely to rise, often at a higher rate (over the long run) than the loan interest. It may not be as good a return as a quality mutual fund, but since you have to pay for housing anyhow…

(2) At some point in the future, you can be *done* paying your mortgage. That’s never true with rent. I’m not quite 30, and a big part of why my partner and I decided to buy a home is that our living costs will be significantly lower during retirement.

(3) Equity in a home can be leveraged to save money. Interest on the loan payment is tax-deductible (meaning most people will recover 20-30% of their interest payment in reduced tax). Home-equity loans are often lower-rate than other credit — I know several folks who’ve reduced high-interest student debt by using a home-equity loan. Regularly paying a mortgage is fantastic for one’s credit score, which can save money when one needs to get a vehicle loan or use consumer credit.

(4) Maybe not for everyone, but at least for me: owning a home has saved me money because I’d rather do something at home than go out. I’d rather spend an evening sitting on my deck with a glass of scotch than going to the local pub. I’d rather curl up and watch a movie (loudly! no neighbors share any walls, ceilings, or floors!) with friends ( For 4 people: $3 for the movie, pennies for the power, maybe $10 for snacks and drinks) than go out ($36 for the movie, another $30 if you have popcorn and a soda).

Back in 2003, I made an offer on a house but it was not accepted as I was about 35K under the top bidder. Now assuming I had bid 535K instead, I would now be in a house valued at about 800K-850K. Reduce the difference with 4 years of ~3300/mo tax-adjusted non-equity payments so the net gain would be about 110K-160K. If I had to sell, chopping off 6% would drop total profit to 60K-110K.

Because my bid was not accepted, I did not have to liquidate my entire investment portfolio for the downpayment. And since that time, my portfolio has grown to an amount significantly larger than the theoretical home net worth. Even if my returns were 0% since then, I would match the house sale profit from just the buy-rent difference of 70K-80K over 4 years.

In the end, it comes down to buy/rent ratios. If the numbers don’t make sense, it’s silly to overspend to satisfy a psychological homeowning need.

This analysis is incomplete. It fails to take into account that the day you buy your house, while you have a debt of hundreds of thousands, you also have an investment of hundreds of thousands, if house prices are rising at a rate that is higher than the interest you are paying on your debt, then you have the potential to make gains far higher than by investing a few hundred dollars a month into equities.

I like to see some actual calculations based on a variety of scenarios, regarding inflation, interest rates, and houseing market performance.

“For most people buying a home will result in their largest monthly bill (by far)”

Simply not true. Just because you can find exceptions or extreme scenarios, doesn’t mean it’s true for “most people”

The math works in this instance, but you wont find too many places where 425K houses rent for 1500. Where I live 1500 in rent gets you a house that would sell for 280-300K. I’m betting this is closer to the national norm than Seattle.

The math on rent vs. buy on that one looks quite different. The “conventional wisdom” about buying vs. renting came about before the bubble and overinflated home prices.

@radiantmatrix: it’s true that at some point you’ll be done paying for your house, but the longer you stay in your house the older it gets and the more money you sink into repairs and renovations. Plus property taxes will keep going up. The annual property and school taxes on the house we just bought amount to almost as much as we were paying in rent every year on our apartment. So I think it’s worth keeping in mind (for future financial planning purposes) that even a paid-off house still costs money to live in.

If my property taxes are $400 a month ($4800 a year, A LOT for my area), yeah I’m still paying money, but there is no way in hell I would find a place to rent for $400 a month that is in any way comparable to my house.

Even adding 1%/month maintenance to that, the person who has his mortgage paid off is the clear winner in my mind. I would rather have a $500/month housing bill into retirement than an additional $300K cash in the bank, which I don’t believe would be realized for most people anyway.

Rent: – $1,495 ($1,495 coming out of pocket)
Mortgage: $2,093 (need to break it down to which goes into your pocket vs interest)

You also need to mention the possibility of rent hikes as well as tax breaks from the government for the first-time home buyer.

“In our hypothetical scenario, a renter who invested in the stock market with the $85,000 down payment plus the monthly difference between the $1,515 rent and the $2,690 home-buying costs would be over $500,000 better off after 30 years than the homebuyer, assuming 4% average appreciation.
”
Assuming that you always make money in stock market and at the same time, your house is situated in a very crappy area, then the above statement is true.

There are other misleading statements as well, but those two above should be enough for now.

This is a great article. In my area rent is higher than mortgage payments so this doesn’t really apply. San Francisco or other high priced markets are different. Speaking of SF real estate, I just read an article about equity sharing where an investor covers the down payment so that someone who could not buy a house can now buy it. I’m trying to get more information and just posted about it here:

@brad: “So I think it’s worth keeping in mind (for future financial planning purposes) that even a paid-off house still costs money to live in.”

That’s an excellent point, and one I wish I would have made more clear, but it doesn’t change my conclusion.

If property tax goes up in an area, so does rent. Besides which, I live in an area considered to be a high-property-tax county. Still, my property tax payments work out to about 5% of my total housing costs. (about 85% is the mortgage, and the remaining 10% is insurance, repairs, and so on).

It is true that there are repair and maintenance costs to consider, but they are quite a bit lower than most renters imagine. My home was built in 1953, and had brand-new windows installed before we purchased. It needs new siding and two new doors. Total cost: $3500. The siding will last at least 15 years, and the doors will last for 50 or more. The annualized cost of such things turns out to be very low.

@Someguy
I agree with someguy. In Seattle I totally agree but it in reality it depends on area.

And also if you buy a property with an guranteed increase of 10% annually then you are well off buying and selling it every two years to take the profit tax free.

I am computer programmer earning about $150K and wife is a homemaker. We bought our house in Atlanta for $240K and now it is appraised for $265K. If we sell our property, after paying 6% real estate commision I would make fairly small profit.

We bought a home in Charlotte,North Carolina for $240K in December 2006 in a up coming area as we were planning to live there for ever.I got with all incentives, 0 down and interest only mortgage.

The property is appraised at $270 now wiithin few months.

Also we want to take advantage of interest only option on our taxes + appreciation after two years.

So we are sure to make atleast $40K in two years without any investment.

Again as Real Estate propfessional say ..Location, Location and Location helps in making a decision in buying or renting.

Again even we a pretty decent annual salary, we think by buying a home in good appreciation area will certianly help building assets soon.

In retrospect, so many of these comments have been proven to be laughable. Appraisals are snapshots in time and they are not real money. I bought my home in 2004 for $305K. On the purchase date it was appraised at $310K. I refinanced after six months and it was appraised at $360K. I sold it in 2011–to buy a retirement home–for $255K. The housing bubble swallowed the difference. “Equity” is an illusion; it’s not real money. (Because this house was my second purchase I managed to break even between those two homes and purchased a more expensive third home at great savings, but buying is a risky venture under the best of circumstances.)

Renting gives you flexibility. A mortgage is deadweight. Who can possibly say where they are going to be in terms of health or finances over the course of 30 years or even 15 years? Home repairs, appliances, insurance, and property taxes can approach the cost of renting in some places. The cost of filling up a home, as opposed to a rental space, adds additional costs.

The housing bubble has destroyed many lives and exposed the fallacies of many of the ideas posted in this forum. Buy only if you have the money and only if you are seeking a home rather than an investment.

As some like buying for “stability”, i like renting for its flexiblity. Plus, I never have to fix anything or call anyone to fix things.

But I’m young and expect things to change someday. Once I plan to stay somewhere for an extended period of time, I will reconsider and run the numbers.

To those who say something to the effect of “one day, you won’t have to pay your mortgage” Very true, but if you were to invest the difference in the market, one day you could pay your rent strictlly off the interest of the money you “saved” by not buying. You say most people wouldn’t invest the difference, but I think a lot of people reading this would

But really there are a lot of individual and personal reasons to rent or buy, and as always, do what works for you.

I didn’t expect to see so many clueless commenters on this blog. Everybody that whines about The Tim not factoring appreciation would do well to note that he assumed 4% appreciation which is quite generous given that even the NAR is predicting price declines. And there’s always someone blathering about “leverage”. Well guess what, leverage does just as much harm as it can do good when home values are tanking. Just look at all of the sob stories in the press of people upside-down in the mortgages that are being kicked out of their houses. I can also vouch for the rent vs. buy numbers. I’ve looked up rentals on zillow and found some that were asking $1500 rent and had just been bought less than a year ago for around $450k.

I swear, some of you didn’t even read the article. Like “Where I live 1500 in rent gets you a house that would sell for 280-300K.” yeah, Tim mentioned that not areas are bubblicious.

“but the market changes and when it does, owners have an opportunity to benefit, whereas renters never do.” I think you mean “when the market goes up”. But isn’t that the psychology these days? Everyone assumes that houses can only ever appreciate.

buy a property with an guranteed increase of 10% annually then you are well off buying and selling it every two years to take the profit tax free

–There is no such thing as a guarantee in any form of investment except Treasury Bills, really.

–You must factor in transactions costs and risk. Since you took the IO option, you bet that you could sell the place for a profit after two plus years (avoid cap gains) and after RE commission to avoid getting hit by the ARM reset and/or balloon payment coming due.

I have seen several articles in ’07 saying this (Buying a house is not such a sure thing investment after all). The analysis in these articles has been very engaging to me. My only question is: where were these articles during the boom years of ’03, ’04 and ’05? For example, it seems all the articles you cited are from ’07 as well.

I guess people just follow trends in establishing conventional wisdom.

Stock market bubble year (’96 – ’99)? Stocks rule. Buy buy buy.

Stock market bust (’00-’01). Stocks are bad. Sell and wait.

Real estate bubble year (’02-’05)? Housing is great. Buy buy buy.

Real estate bust? Renting + Stock market is great.

Makes me think, just keep things simple: buy as boring ass Index fund. When you have a wife and kids, buy one house and live in it for 10+ years before moving. Keep putting spare change in the boring ass Index fund.

I’m in Seattle and I do think the numbers in the example make sense. Yes, you can rent a $400K property for even less than $1500. My roommate and I rent a 2 bedroom 2 bath condo in a very desireable location for $1250 a month. It would definitely sell for over $400K, probably closer to $450K. And as more condos are built in Seattle and bought by investors, renting condos will probably continue to be a deal.
Yes, I say probably. No, I don’t know what will happen. Yes, I wish I had bought a house in Seattle 10 years ago.

Well, I’ll put in my two cents on this issue. Please not that I’m a 24 year old with currently no outstanding debt (less credit card that is paid off every month).

I live in the bay area. I make as much as my parents make individually currently. Which for most people is a decent salary and allows me to live in the area with just watching my budget to an extent.

The average base price for a home is 600k plus. Meaning that to have a 20% down payment I need to have 120k. I have 20% of that 20% down payment right now. I have no desire to actually buy a house in this area for that very reason. For now, the little nest egg of housing down payment will just get to grow slowly. Course consider that at 5% interest that 120k would grow 6k per year as well…adding almost 500 dollars in interest every year…its quite a predicament.

I’ll be renting for a long time to come, as do all the people I know down here, because as a single person..you simply don’t make enough on the single salary. Even with eventually two and the friends making 200k+ a year, have no intention of buying a home.

I thought the same thing, being an investment property owner and landlord. We rent our properties to cover the mortgage, the real estate tax, insurance (high expense here in Fla.) and a small amount for repairs & upkeep. Our least expensive rental is at $1200 and that is for a house that we bought at $140,000.

The author may have used an example where somone bought a house pre-boom and while it would sell for $425,000 now they bought it much cheaper and therefore can rent it out for much cheaper. A better example would be two similar houses that were built and sold and the same time, one that is be resold and one that is a rental.

There are advantages to real property ownership and also to renting. I think a lot depends on individual circumstances and your life plan. If you rent you may have more cash available but you have to make sure you are doing smart things with the cash (investing vs. vacations). Real estate can be a very smart investment if you are buying at a good time (i.e. not at the peak) and you are buying the right real estate (i.e. less than the bank says you can afford) or you plan to keep the real estate for more than a few years.

@Sam “The author may have used an example where someone bought a house pre-boom and while it would sell for $425,000 now they bought it much cheaper and therefore can rent it out for much cheaper. A better example would be two similar houses that were built and sold and the same time”

No that would not be a better example. Unfortunately for landlords (and upside-down flippers who have become landlords) rental prices aren’t set by adding up your monthly costs and maybe a slight profit. Rental costs are set by the market. As a renter I am going to find the most apt or house for my rental dollar. I don’t care if a landlord is paying more money to the bank and in taxes than he charges me in rent. This is blinding evident in large housing developments where there are hundreds of each model, exactly the same. Whoever sells or rents a house for the cheapest amount sets the market. Later renters and buyers will use that price as a the current market value (as a comp). So please realize that the fact that there are landlords out there with substantial equity who are able to undercut a landlord that bought in the last few years is a feature of this market, not an exception.

It is worth noting that if you assume a 4% gain in value and a 6% mortgage rate on a 100k home with 20% down the interest and gains in property value are fairly close. 4k to 4.8k. If you look at it this way you only loose about $800 (0.8%) the first year. Your tax deduction could even leave you in the positive range depending on how much you spend on maintenance.

It isn’t necessarily a good investment, that depends on the market, but is one of the few ways to buy a home.

While I can not say if this article is accurate in the global sense, i can say it is not accurate for the area I live in.

My own personal example:
I bought my condo at 156k – 1200 sqft, 2 bed, 2 bath
An apartment down the street, close to the same size – rents at 1200.

After my mortgage, association fees, and property taxes, i get pretty close to that 1200. in fact, its almost a wash.

However – I was able to rent that extra bedroom and bathroom – which is added income for me. I had a roommate paying 1/2 my living fees, and while only a small percentage may go into equity, at least it is.

I guess my point is that it is really area specific – and it seems silly to write an article saying one option is better than the other, when it would take specific analysis for each individual situation to determine which one is better.

Sam – Agreed, it is indeed realistic to find affordable rentals. Rental markets aren’t solely based on current purchase prices; there’s a rental market, and owners will charge whatever that market will sustain, often adjusted downward for good, long-term tenants and low cost-of-ownership, such as when the property was purchased long ago or is one of a set among which costs and rents are distributed.

Another point that is often overlooked is that yes, rents do go up sooner or later, just like incomes sometimes get interrupted or go down (something many new homeowners seem to believe won’t happen to them), but in such situations, renters generally have the option to move, with relative ease, to another rental that’s within their means.

Something that hasn’t been touched on by anyone is changing personal circumstances. Yes, it’s important to take into account the housing market, and I write this fully admitting that I bought at an advantageous time. However, your house is more than an investment, it is your home, and it is a hedge not only against inflation, but against other personal circumstances.

I bought a house right out of college, and many of my friends thought I was nuts. People told me a one bedroom was a “bad investment” because people who had or wanted kids would never consider buying it. However, I could afford it, it was not much more than rent-control at the time, and it was in an area I felt was undervalued. I also figured that it would allow me to have a “base” in a desirable area, while having the ability to travel and explore.

My health has been declining for years, in spite of my youth. I am no longer able to work full time, or even in a part time job that requires regular hours. Meanwhile, rents here have increased far beyond my ability to pay, and home prices are through the roof. I was smart enough to get a fixed rate mortgage and am paying less (yes, including maint., prop tax, and ins.) than my poorest friends pay for rent. We grow some of our food, to the extent we are able, and I am frugal beyond measure. More importantly, we have a fantastic community, and as we are all here longer and longer, we are increasingly tight-knit. Some of our best friends are our neighbors. This is priceless.

I don’t know what I would do as the same “just out of school” kid in this market, but I would encourage anyone weighing these questions to factor in the intangibles and the possibility that they will not be able earn as much and for as long as they do now.

I am astounded at how many people here are missing the point of the article.

The point is this. Use a model like the one ‘The Tim’ used to decide *quantitatively* which is best. If you don’t like the model ‘The Tim’ used, make your own. (I happen to think his model is pretty accurate)

Yes, I am sure some of you live in areas which a $150K house rents for $1200. Great. You should probably buy. In Seattle, one ends up renting a $470K house for $1500/month. Buying right now here would be a terrible choice. The only way to know for sure is to run the numbers.

Again, the point here is to throw out all the brain-dead arguments Realtors like to spew. Run the numbers and see for yourself. They usually don’t lie.

In the short term resnting may be cheaper, but in the long run owning has to be.

All else being equal, when you rent you’re paying the mortgage, utilities, repairs, etc… AND the landlord is making a profit. It’s hard to see how that can be cheaper than paying for all those things yourself and not having to let someone make a profit.

Of course the reality is a lot more complex than that and there are many, many other factors to consider.

I’m probably one of the lucky ones, in that I bought my house just out of college for $195k in southern California in 1999. I had almost no down payment, and swung the mortgage (about $1100 on a 30 year) by renting out two rooms to college buddies for a couple of years. At the time i had about $13k in the bank from an inheritance from my grandmother. My thoughts on this was fix my cost of living, get a tax shelter, a little extra income and have some equity to buy a home when I got married. My mom of course said I should wait until I got married before buying a house (but then, she also said I shouldn’t go into computers but be a doctor instead).

It is now 8 years later and I’m still in the same house, but with a wife and a 3 year old. I’m now watching the houses selling in my neighborhood for about $650k. Rent vs. own? I carefully plotted out my expenses and found that around 5 or 6 years was the break even point for me, so I’m in bonus time (I actually probably broker even about 2 years into it). At this point it would cost me more to rent than it does to live where I do. And I think that’s one of the items this article doesn’t address well.

If you move from place to place every two years, rent rent rent! if you buy, expect to be there about 7 years to break even, and do whatever you can to get into a home, 1% down loans are actually pretty nice because of leverage, put $5,000 down on a $500k home and have it go up 5%, and you’ve made $25k (500%). And you never want to have too much equity in your house if you’re really convinced it’s going to be an investment.

And ultimately I view a house as a place to live that’s how I view buying a house – it’s an expense, not an investment, and when I do my financial planning, the house equity doesn’t factor into my overall plan because it isn’t something I can readily rely on or even want to depend on (much like social security) when determining my purchasing power.

I’ve also been putting a little bit each month into 401ks, roth ira, a 529 plan, and since i teach part time a 457b and anything left over for the month goes into an investment brokerage account. Average 5 year returns for these accounts has been something like 23% annualized.

I haven’t done the math yet, but let’s figure i could have put another 1000 a month into investments instead of the house…and let’s say for calculation sake that we have an annualized return of 25%

$1000 X 12 months is $12,000 X 25% = 15,000

After 8 years I would have $273,049 in the account following this rather optimistic formula.

Now let’s look at the house, say I really need to get out of it so list at $550k, sell and pay closing costs around 44k (8% of the value since i’m pessimistic) for an in hand of 506k, subtract the current loan of 170k, for a total walk away of around 336k

So in this scenario, as a home owner right now, I’m still up 63k 8 years into living there (it’s the power of leverage).

Now, 20 years out, following this same formula, i would have 3,979,528.87 in my investment account and 31,985,996.39 in 30 years (power of compound interest)

Bottom line, buy the house because you want to live in it, not because it’s an investment. And only buy if you’re planning on sticking around in the neighborhood for 5 years or more. And if you’ve convinced yourself it’s an investment, you’ll want to flip it about every ten years and buy another property for almost nothing down in order to take advantage of leverage (Tax laws allow you to take no capital gains if you’ve lived there 2 of the 5 years you’ve owned the property).

AND whatever you do, never, ever, ever, ever put down 20% if you can get away with no money down…use the bank’s money to help you grow rich through leverage.

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